TRUMP BRINGS LAFFER BACK INTO ACTION

06.05.2017 21:59

A lot of libertarians, if asked, have a clear image in their minds of what the Laffer curve is, as it has been one of the greatest advances in modern economics and has always backed up many of our arguments in terms of how lowering tax rates can help to achieve a greater economic growth and individual development. More than 40 years after that 1974, when Arthur Laffer presented his curve, Donald Trump has brought it into action again by applying it into real politics by bringing in deep corporate tax cuts from 35% to 15%, and what has been argued by many as being unrealistic economics, will be surely a great impulse for economic expansion and job creation.

The tax cut is trying to reduce pressure on tax payers, both corporations and workers, by employing rate reductions without restricting deductions or increasing public expenditure, which is why many people, mainly Keynesians have argued that it will increase America’s deficit, which in the short run can be discussed, but having no doubt of success in the long term, being this a period of 2-3 years’ maximum. Anti-Trumpism in America is deeply obnoxious as while several Republicans have always been in favour of tax cuts, now when all those thin air words come down into action, they blamed them for being “too anticipated” or for generating deficit.

A GRAPHICAL EXAMPLE OF THE LAFFER CURVE’S MODEL:

We have already seen similar situations during Ronald Regan’s and George Bush’s mandates, when tax cuts where a prominent policy creating an expansion in labour demand and economic growth which followed it, cutting in many occasions the American debt, which in those ages was not even half of what’s nowadays. The problem is how we see social expenditure and subsidies as magnificent measures and normally excuse them for causing debt to rise up to overwhelming levels, up to the 19 trillion debt the US has accumulated, with more than 50% of that total national debt having been produced by Obama and its “Yes We Can” policies. Because, overall, we shouldn’t forget the 500 million annual deficits that Barack has left, or that American debt in Obama’s hands jump by more than 121% if we take into account federal and local debt, at the same time he now accuses Trump for an imaginary situation in which he will rise deficit due to his slashes on tax.

ACTUAL FEDERAL SPENDING (2016):

Trump’s budget has been deeply responsible and mostly libertarian in my opinion, making great cuts on some sectors and superficial services which could be paid for privately our through PPP (Public-Private Partnerships). It’s true that Mr. Trump has increased public expenditure in Defence (mainly security and army) by 10%, but it is a realistic and necessary expenditure to fight against ISIS terror and anti-West policies being developed by Putin and its former allies. In agriculture, he has cut subsidies by 20%, as in transport and energy production, where he has decreased public expenditure by 21% and 13% respectively. These subsidies which have been eliminated where just stimulating unproductive and non-innovative sectors, where capital should be dispensed by private hands and not with the use of taxation. Talking about commerce, he has also reduced expenditure by 15.7% in extra agencies and commissioners, and mainly subsidies to do ridicule investigations about mines and natural landscapes. In Justice and Treasury, he has cut down bureaucratic expenditure by 4% in both, firing unnecessary personnel and adding extra resources for both departments. The greatest cuts have been produced in healthcare, when he expects to reduce 15.000 million dollars by eliminating Obamacare, and also reducing public servants in State agencies as NIH, being reduced only unnecessary and bureaucracy expenditure. In Education, he has also reduced expenditure by 13.5%, but Trump has increased on the other hand the number of offered scholarships for vulnerable people, while other educational programs could be perfectly financed by the private sector, adding more competition and consequently efficiency to the educational market. My favourite has been the 10,900 million dollars taken out of “climate development programs”, which were mostly destined to climate change studies and ecologist’s organizations.

The corporate tax cut, which has been the most significant these days, will serve also to liberate small business from their fiscal oppression and allow them to invest that exceeding capital in re-investment into the business to generate further expansions and increasing competition into the market, in search of greater efficiency. Even though some detractors think that the Income Tax cuts will only benefit the rich, reality is that they will mostly affect middle class Americans, which before were paying 10%,15% OR 25% depending on their rent will now be paying only 10%, and those most privileged earning wages of over 600,000 dollars, who before payed 39.6% will now be taken off just 35% of their income… so who has been most benefited? Other of the reasons for Trump’s tax plan being auto financed is that this policy will provide Americans with larger amounts of capital which will be spend on consumption goods and services, rising aggregate demand levels and consequently generating faster economic growth.

These types of policies are the best ones to attract jobs and companies to the USA, generate larger levels of FDI coming into the US, and of course revaluating the dollar. This tax rates reductions will generate revenues by more than 2 trillion dollars value over the next 10 years, and this will follow a great impact on economic growth of more than 1.8%, as it has been estimated for this year. With this supply-side policy and a correct management of the monetary policy by the FED, the US can achieve a growth rate of 3% annually in comparison to the poor rates registered in recent years, without taking into account the benefits generated by the deductions in personal income tax.

All libertarians should give a random applause to Trump’s plan for reducing fiscal exploit in the US. It is necessary to have leaders aiming to reduce the size of the state by cutting expenditure, mainly in irrelevant sectors and allowing for a greater capital flow into the country. As we talked in previous articles, with Brexit, now fiscal competition is essential, and the USA has shown with this fiscal plan wanting to play its card in it. European countries as a whole into the EU should follow America’s example and adapt a more competitive and efficient fiscal policy, allowing enterprises to allocate freely around Europe and benefit from the competitive and entrepreneurial advantages from each member nations. The only path for a stable and realistic economic growth in the long term is, as always, bringing Laffer back into action.